HBB Rates The Media: Mid-West
The HBB looks at the media and the housing bubble, in the mid-west.
The good:
The Kansas City Star, May 2005: “The benefits to U.S. exporters from a modest rise in the Chinese currency would most likely be small, while the effect of higher interest rates could be larger.”
“If that were to happen, the effect could be acute in the housing market. Investors in housing stocks have been nervous for some time, happy to see ever-higher profits but worried that the good times must end someday and fearful that they could be left holding the bag when that happens.”
“When things were at their worst in Las Vegas, Pulte was seeing cancellations of home purchases that amounted to 75 percent of new sales. ‘The risk of similar, and perhaps more prolonged, regional downturns should not be ignored,’ (bond analyst) Kathleen Shanley wrote in a note to clients.”
“Shanley points out that Pulte’s inventory of land is concentrated in areas where home prices have been rising rapidly and that the company’s cash flow is negative, even as profits soar, because of all the land it is buying. Pulte has been borrowing money even as it buys back stock at high prices.”
The Pioneer Press, May 2005: “Last year set a recent record for home foreclosure sales in all seven metro-area counties, and so far this year Ramsey, Hennepin, Dakota and Scott counties are ahead of last year’s pace. ‘For all the news that the economy is getting better, it’s not showing up in our office,’ said Hennepin County sheriff’s deputy John Villerius. ‘It doesn’t matter how good the economy is. These borrowers run into inevitable problems and discover they can’t afford the homes.’”
“Several sheriff’s departments in the seven-county metro area report that many of their sales are relatively new mortgages, originated within the past few years. ‘I expected it. I think it will get worse,’ said Sgt. Lori Kratzke of the Ramsey County Sheriff’s Department, who handles the county’s foreclosure sales.”
“Barb Carr, one of two full-time foreclosure-prevention specialists working for the city of St. Paul, is more explicit. ‘God forbid what’s going to happen when those interest rates go up.’”
Pioneer Press, May 2005: “Greenspan has abandoned what seemed to be his long-held belief in monetarism and limited government. He drank the Kool-Aid of Keynesian gas-and-brake-pedal stomping. We are returning to the 1970s.”
“Greenspan was expected to follow his predecessor’s aversion to jockeying the money supply in response to economic twitches. Perhaps he did for a while. But cautious monetarism did not last long. By the 1990s, his foot alternated between the monetary gas and brake pedals like any Keynesian. Economy growing after 1991 recession? Double the Fed Funds target to 6 percent. A little slowing in late 1995? Back to 4.75 percent. Stock market bubble still bubbling? Back up to 6.5. Too much? Down all the way to 1 percent.”
“Try to bind up all economic wounds with the money supply and one will not only fail, but will also infect the patient with the septicemia of inflation and cause inflationary flare-ups at the worst possible times. The long-run outcome will be worse than if one had exercised realistic caution from the outset.”
The Des Moines Register, May 2005: “‘I don’t mind paying an inflationary increase, but mine is like 17 percent. That’s out of line. I haven’t done anything to the house to lift it up that much,’ Ben Veach said. ‘This is just a way to raise taxes without saying you’re raising taxes. And it’s so blatant. But there are still some of us out here who’ll fight it.’”
“Ralph Fetters and his wife recently paid off the mortgage on their home and retired. Fetters worries now, on a fixed income, he can’t continue to absorb the mounting tax burden.”
“‘You keep getting those raises year after year, and you can have a problem,’ Fetters said. ‘I’m 65, and I’ve lived here all my life. And I’ve never seen a property tax (bill) go down. It’d be nice to see that once in my life.’”
The Plain Dealer, May 2005: “The annual number of foreclosure cases filed in Cuyahoga County has almost doubled since 1998. At the end of April, the court had nearly 12,000 foreclosure cases pending, the highest volume in the state. No firm figures exist, but the suburbs say that they have dozens, even hundreds, of empty homes. They worry that the homes will attract arson and other crime, reducing property values. ‘The neighbors are just beside themselves,’ South Euclid Mayor Georgine Welo said. ‘Who wants to live in a neighborhood where you have these popping up all over?’”
“County Commissioner Tim Hagan wonders whether speeding foreclosures and putting a flood of homes up for sale would simply overload a weak housing market. ‘We’ve got a serious crisis in that regard in Cuyahoga County,’ Hagan said.”
The Ann Arbor News, April 2005: “Hess falsely entered information during the processing of mortgage applications. (She) called the scheme “bankruptcy for profit” and told the anonymous tipster that she was receiving money from mortgage brokers to approve loans.”
The Chicago Tribune, April 2005: “The facts of investing life belie the entitlement mentality. ‘People think life is too short and they deserve to be part of a society that becomes richer and richer,” Werner F.M. De Bondt said.”
“Raymond James analyst Rick Murray wrote in research note last week, ‘Investment sales have been a key driver of the housing market in the past few quarters and, in fact, the past two to three years. With nearly 12 million empty housing units in the U.S., we find it implausible to conclude that there is a housing shortage of the magnitude that would drive the recent levels of price escalation.’”
“Even the National Association of Realtors, usually an industry cheerleader, is cautioning that real estate is a long-term investment.”
The bad:
CBS2 in Chicago, May 2005: “How big is the boom? In 1990, Chicago had around 50,000 downtown housing units. Today, there are 85,000, a 70 percent increase, and more on the way. ‘We know well over 10,000 units that developers are trying to get started, get marketing for this year,’ Gail Lissner said. ‘We are certainly seeing a growing segment of buyers who are using the downtown base as their second home.’”
“A surge in investors, or speculators, who buy condos hoping to re-sell quickly for a fast profit, are warning signs of an overheated market. Experts agree that speculation is rising.”
Market observers:
April 2005: “A growing number of smaller developers are building ’spec’ houses, some with price tags as high as $34 million, without any specific buyers in mind. Some economists caution that it could lead to price declines if there is even a slight economic blip. ‘These guys typically can’t carry these houses for very long, especially these small builders, and then you can get into a fire-sale type situation,’ said Thomas Lys.”
May 2005: “A mortgage insurer that NovaStar sued on charges that it failed to pay claims has filed a counter-suit alleging fraud. In the action, filed earlier this week in the U.S. District Court for the district of Kansas, PMI Mortgage Insurance alleges that it was misled by NovaStar when PMI set the terms on insurance for 6,300 loan made from 2000 to 2002. The loans in question, known as ’stated income loans.’ PMI’s suit cited testimony of Rachel Jones, NovaStar’s director of corporate credit, who said the purpose for asking the borrower to state income is ‘because our investors require the borrower’s stated income.’ By investors, she says she was referring to the likes of Fannie Mae, which buys loans when they’re packaged and sold as part of a securitization.”
“NovaStar says that last year it sold recourse loans that have an outstanding balance of $11.4 billion, up from $6.4 billion the year before. Defect-related repurchases, it adds, have been insignificant, and “as such, there is minimal liquidity risk.”
May 2005: “St. Louis Federal Reserve Bank President William Poole…said that while housing prices were rising quite rapidly in some areas, most of the movement was in a ‘narrow segment’ of the market’ suggesting he saw little risk of a national bubble.”
“Poole said home price gains appeared to be mostly explained by the low level of interest rates and rising incomes. Anecdotal reports suggested workers were still ‘in pretty plentiful supply. It looks like there’s a fair amount of room for expansion of employment without creating a lot of upward pressure on wages.’”
May 2005: “(Warren Buffett)… and Munger issued stern new warnings about the residential real estate ‘bubble,’ the destabilizing effect of hedge funds on the financial markets, and the possibility of another terrorist strike against the United States…A lot of the psychological well-being of the American public comes from how well they’ve done with their house over the years. If indeed there’s been a bubble, and it’s pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices].”
“We’re like an incredibly rich family that owns so much land they can’t travel to the ends of their domain. And they sit on the front porch and consume a little bit of everything that comes in, all the riches of the land, and they consume roughly 6 percent more than they produce. And they pay for it by selling off land at the edge of the landholdings that can’t see. They trade away a little piece every day or take out a mortgage on a piece.”
“Buffett to Munger: ‘What do you think the end will be?’ Munger: ‘Bad.’”
May 2005: “A year ago, in April 2004, the average sale price was $US118,000 and now it’s almost $US135,000,’ (a) broker said. ‘Everybody’s asking the same thing: how long can this train keep going?’”
“Employers in the Rockford metropolitan area cut 9400 jobs between March 2001 and March 2005, as the area lost a fifth of its manufacturing jobs. Rockford’s unemployment rate was 6.1 per cent in March. ‘In our area, we are starting to see some affordability issues,’ Mr Nalewanski said. ‘We’ve had a decline in salaries due to the exodus of manufacturing jobs and their replacement with service jobs.’”
“Dean Baker. ‘People are betting on the value of their homes rising, and they’re not saving. This is a classic bubble. We may be seeing the bubble spreading’ from the east and west coasts to inland areas. ‘People are buying homes every day and paying much more than they’ll be able to sell them for. A lot of people are going to find themselves a lot poorer than they expected,’ he said.”
